Accountants working with the first mid-market accounting systems in the 1990’s were quite familiar with the many processes and late nights involved with closing a month-end or year-end. The best systems of today, including Microsoft Dynamics NAV, rely on real-time posting with a minimum of processes to be carried out at a close.
Real-time data generally means you only enter and post data once to update your operational and financial modules. Posting a sales invoice, for example, updates your accounts receivable sub-ledger, deducts units from your inventory system, and updates your general ledger accounts, all at once. This is in contrast to older legacy systems that batched up transactions while waiting for a month-end process to move the results over to the general ledger. As a result, financial results were only as accurate as the last closed month-end and were anxiously awaited by leadership to “see how the month went”. Real-time posting and timely information can have a very significant effect on a company’s profitability. The following are just five of the ways this can happen.
1. Identify trends much more quickly
Month-ends would often take three weeks to close, meaning it could take up 50 days for the earliest transactions to hit your reporting system. That is almost two months of not having accurate financial information for a reporting period. Contrast that to daily reports available from real-time systems.
2. Make critical decisions faster
This differs from the above point in that we are talking about major decisions such as mergers and acquisitions, lay-offs, etc. When oil prices fell through the floor back in 2008 and 2009, companies had to react quickly and needed accurate and complete information as quickly as possible.
3. Take advantage of the benefits of “just in time” processes
Much has been made of “just in time” systems over the past decade as companies seek to minimize investments in inventory, whether to support a distribution company or manufacturing processes. Cutting back on inventory by 20% or being able to identify and react to seasonal trends can generate significant savings in the investment costs of carrying additional inventory, the physical space to hold inventory, and the manpower to manage shipping and receiving.
4. Reduce work and minimize administrative costs
One of the first implementation projects we were involved with back in the late 1980’s combined three different accounting systems necessary to handle the various aspects of the organization’s business. The result was a cutback of 25% in the number of administrative staff necessary to run the system. Data was only entered and processed once with month-ends taking significantly less time. Although the system had some aspects of batch processing, its near real-time abilities contributed significant savings and generated a positive return on investment in less than one year.
5. Cash flow is king
Managing cash flow in older systems consisted of adding up the cash and loan balances, anticipated receivables collections, and deducting accounts payable requirements. Newer cash flow modules such as those found in Microsoft Dynamics NAV include all projected sources and use of cash including projected purchases of fixed assets, purchase order commitments, and expected sales booked in the sales order module. Adjustments can be quickly made based on new information. For example, if your customer phones up and says they won’t be able to pay you the $100,000 they owe you for another month, you can quickly go into your cash flow module and check to see whether the collection delay is going to create any significant problems for you. If the amount is significant enough, you may need to arrange alternative financing. Having a real-time cash flow module with links to all the relevant modules can save significant amounts of time compared to manually accumulating this information and avoid costly cash shortages, whether from business cycles or mistakes.
These are just five specific examples of how real-time systems can make you more profitable, but the underlying major benefit of a real-time accounting system is that it allows you to develop the metrics specific to how you think the business should be run. What are the indicators that you think matter to your business? Now you can track them on a daily, weekly, or monthly basis, without having to bother your accounting system or hire expensive financial analysts. Real-time systems are the foundation piece for reporting dashboards and business intelligence systems. Everyone wins with better information.